The No-Show Double-Dip

By

Gene Epstein

April 14, 2003 12:01 a.m. ET

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THAT NEIGHBOR OF MINE -- the one I call the Double-Dipper in light of his persistent belief that a second economic downturn is just around the corner -- knocked on my door last week for another of our friendly chats.

I: Hey, give two cheers for the U.S. economy!

He: Thanks, but I'll give it the three boos.

I: But just think about what happened in the first quarter. The economy suffered a series of body blows like war jitters, fear of terrorism, soaring energy prices, falling stock prices, and the decline in business and consumer confidence you'd expect in that situation. If you thought the economy was already fragile enough to go down for the count, this was surely your moment.

He: So?

I: So the economy took the blows, and heaven knows --

He: It did it your way.

I: You could say that. You could also say the double-dip was given every possible chance in the first quarter, and wouldn't take it.

He: Is it your way for GDP growth to run only 1.7%?

I: No and yes. The consensus of Wall Street economists had first-quarter GDP growth running at an annual rate of 1.7%, but after Friday's upside surprise on retail sales for March, they must be busy marking up their estimates. Growth in the first quarter was probably about 2.5% --

He: Is that what you mean by "no"?

I: Yes. Growth of 2.5% is a good percentage point lower than I expected early this year. Coming on the heels of 1.4% growth in the fourth quarter, it explains why payroll employment has fallen since December. It's also not fast enough to keep the jobless rate from rising. Based on how respondents on the Conference Board's consumer confidence survey answer questions about how hard or easy it is to get jobs, the unemployment rate might jump from 5.8% in March to 6.0% or more in April.

He: In case you don't know, the real jobless rate-the rate of underemployment -- was more than 12% last month.

I: Yeah, I do know, since that's what The Wall Street Journal said early last week. People categorized as unemployed say they want a job and have looked for work in the past four weeks. That underemployment rate you quote includes about 3.5 million folks who say they want a job, but admit they haven't looked for work in the past year!

He: So why not count them, you cold-hearted Wall Street suit!

I: Okay, let's say those people really are willing and eager to work. The Journal article neglects to mention that the rate of underemployment was even higher in 1994 and '95 -- three to four years following the recession of '90 to '91, and just before the boom that began in '96. So today's underemployment rate may also be a harbinger of better times to come.

He: Which you think it is.

I: I don't think it adds anything to our knowledge of where we've been or where we're going. But as I pointed out last week, if it hadn't been for those exceptional shocks -- especially the leap in energy prices -- the economy might have performed quite well in the first quarter, with growth running nearly 4.0%. And assume that the Iraqi war really is winding down with no new war on the horizon, that fear of terrorism is on the wane and that energy prices have a better chance of falling than of rising, then the current quarter is already starting with a huge advantage.

He: Let's hope.

I: We've already seen hopeful signs in the decline in gasoline prices, the rise in the Mortgage Bankers index of home purchasing to near-record levels, the rebound for early April in the Michigan survey of consumer confidence, and the down-tick in new unemployment insurance claims.

He: New York Times columnist Paul Krugman wrote on Friday that jobless claims are "well above the level that would signal an improving labor market."

I: Like most naive analysts, Krugman seems to think claims over 400,000 per week are quite high. Scaled against the higher labor force, the four-week average of 429,000 is about neutral.

He: The Times business section said Friday that growth will be slowed "by the need to work off excess inventories" acquired over the past two months.

I: I know, and when I read that over the phone to an economist I know, he laughed out loud. There are no excess inventories to be worked off, because none were worked up in the first place, as the data readily show.

He: So far you've slammed the New York Times and The Wall Street Journal. Who's next?

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